I initiated a new position today in L Brands Inc (LB) at $46.93. The share price dropped over 14% today due to a 9% drop in June sales compared to last year. However, this should have been expected as the company discontinued swimwear and apparel product lines which decreased sales by 7% and 10% respectively. Since the sales drop is only 9% this must mean that that sales of the remaining product lines actually increased.
I’m not sure that existing the swimwear business was the best idea. The company believes the swimwear business to be to competitive and that it took up room in the stores that could be better utilized selling higher margin products. They wish to focus on their greatest strengths and most profitable product lines.
By the end of the year, company expects to maintain 7-10% annual sales growth.
I like the company due to it’s strong Victoria’s Secret and Bath & Body Works brands. Many of the winners in retail will be companies that maintain their own brands. They have the advantage of higher margins and brand loyalty and if people want their brands they need to go them. L Brands Inc’s brands are leaders in their markets giving them a wide moat. I don’t feel that Amazon or other retailers could easily sway their customers with private label brands, which is a major fear with many companies lately. Consumers of undergarments view comfort, fit and consistency as more important than price and find that switching costs as high due to the unpleasant experience of trying on multiple brands to resize.
There is also a lot of international growth potential.
As an investment, I’m most concerned with their book valuation. They currently have more liabilities than assets meaning a negative stockholders’ equity which is concerning. However, with their income and margins, I’m hopeful that they should be able to get their debt situation under control soon.
Retail stocks have had a lot of pressure on them, but has made for some good opportunities and I think this one is one of them. In the meantime, the company pays a decent dividend of 5.16% as of today’s close, which will help keep a floor on how low the stock will drop.
I understand that there’s a good possibility of a further drop in share price at which I may consider adding more to my holdings.